Banks, youth unemployment top threats to euro zone - Reuters poll

LONDON Thu Jul 11, 2013 5:09pm BST

An illuminated euro sign is seen in front of the headquarters of the European Central Bank (ECB) in the late evening in Frankfurt January 8, 2013. REUTERS/Kai Pfaffenbach

An illuminated euro sign is seen in front of the headquarters of the European Central Bank (ECB) in the late evening in Frankfurt January 8, 2013.

Credit: Reuters/Kai Pfaffenbach

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LONDON (Reuters) - The poor health of the banking system and youth unemployment are the two biggest threats to the future of the euro zone economy, according to a Reuters poll of economists on Thursday.

The survey also showed they agree the European Central Bank's adoption of forward guidance marks a significant change in its approach to policymaking, rather than merely tinkering.

As in a similar poll last month, the survey of more than 40 analysts suggested the economy stagnated from April through to June.

That would at least mean the 17-nation bloc has exited a recession that stretches back to the end of 2011, but few economists predict anything other than tepid economic growth from here onwards.

Consensus quarter-on-quarter growth is not expected to top 0.3 percent at any point until 2015 at the earliest.

And the respondents said there are big reasons why the euro zone will lag its major economic peers for years to come, even assuming the sovereign debt crisis does not flare up again.

Firstly, the region is still lumbered with a sickly banking system that has failed to get credit flowing, particularly in countries such as Spain and Italy.

"The banking system is a problem because it hampers monetary transmission to the economy and the long-term growth outlook is key for investors to regain confidence and to look through short-term volatility," said Elwin de Groot, economist at Rabobank.

Out of 30 analysts who answered an extra question, 12 said the banking system was the biggest weakness in the euro zone economy - the most popular answer.

European Union leaders last Friday said they want a deal by the end of the year on a way to resolve failed banks at a European rather than national level, although there are objections from Germany.

By contrast, economic growth in the United States, which sorted out banks' bad assets in a painful but quick process in late-2008, is expected to pick up in the second half of this year.

Youth unemployment was cited by 10 economists as the biggest threat to the region's economic future.

Some 23.8 percent of under-25s were unemployed in the euro zone during May, according to Eurostat, or more than 3.5 million young people.

That means a significant slice of the young population are right now missing out on the skills and experience that would benefit the economy in the long-term, harming future growth.

Greece and Spain have the highest levels of youth unemployment, with more than half of under-25s out of a job in both countries.

Germany, which economists expect will steam ahead relative to its euro zone peers, has the lowest rate of youth unemployment, at just 7.6 percent in May.

The poll showed the euro zone's main jobless rate will peak at around 12.5 percent by the end of this year and stay there through 2014.

Despite that, only around a quarter of respondents expect the European Central Bank will cut its main refinancing rate again from its current record low 0.5 percent in the next 18 months.

Its decision earlier this month to break with tradition by declaring it would keep interest rates at record lows for an extended period represents a significant shift in policymaking, according to 24 out of 30 economists.

The remaining six disagreed.

"It is a major change in policymaking. It would be unthinkable in 1992 and a great surprise in 2002. But it will be a centrepiece of appropriate monetary policy in the future," said Birgit Figge, strategist at DZ Bank.

(Polling by Snehasish Das and Ashrith Doddi Editing by Jeremy Gaunt.)

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